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Sentiment fragile amid US debt ceiling standoff

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By Lukman Otunuga, Senior Research Analyst at FXTM  

Most Asian equities were mixed on Tuesday as investors digested weaker-than-expected Chinese economic data. Industrial production and retail sales data from the world’s second-largest economy missed expectations in April, pointing to further signs of an uneven recovery.

European futures opened flat as political and economic uncertainty rocked sentiment in the region.

Despite Wall Street closing higher in the previous session, US equity futures remain shaky ahead of a debt limit meeting between US President Joe Biden and House Speaker Kevin McCarthy later on Tuesday.

In the currency space, the dollar steadied while the Australian Dollar weakened against every G10 currency following the disappointing China data.

Regarding commodities, gold seems to be on standby, while oil extended gains from the prior session as the US government confirmed plans to refill its strategic reserves.

Tuesday morning’s data revealed that the rate of UK unemployment rose to 3.9% in the three months to March, up from 3.8% in the previous quarter. The claimant count jumped by 46,700 in April, surpassing the 26,500 in the previous month.

Average earnings, including bonuses, increased 5.8% year-over-year in March versus 5.8% in February. GBPUSD fell in response to the report as deteriorating labour market conditions fuelled expectations around the BoE pausing rate hikes.

EURUSD under pressure

The data dump from Europe Tuesday morning could trigger fresh volatility in EURUSD. Much attention will be directed towards the German ZEW Economic Sentiment Index and second estimate of first quarter GDP.

The German business survey is forecast to decline to -5 in May compared to 4.1 in April. Ultimately, a set of disappointing economic figures may question the ECB’s ability to keep hiking rates, weakening the euro as a result.

Taking a look at the technical picture, EURUSD remains under pressure on the daily charts. A solid break below the 1.0845 support could open the doors towards 1.0800, a level where the 100-day SMA resides.

Volatile week for USD?

This could be a wild week for the dollar thanks to a cocktail of political uncertainty, global growth fears, key US economic data, and speeches from numerous Federal Reserve officials.

All eyes will be on the ongoing drama regarding the debt limit with a meeting between US President Joe Biden and top lawmakers planned for Tuesday afternoon.

On the data front, investors will be presented with key reports from economies across the world which could fuel concerns over growth if they disappoint.

The latest US retail sales figures among other data could influence expectations around the Fed’s next move, especially after the central bank stressed that incoming data would influence monetary policy decisions. The chorus of Fed speakers throughout the week may also add to dollar volatility, especially if more clues are offered on the Fed’s policy path.

Gold slips to $2,000 level

Gold slipped towards the psychological $2000 level Tuesday morning as investors braced for a key meeting between President Biden and key lawmakers at Congress to resolve the debt ceiling stalemate. The precious metal is likely to draw support from the growing fears and jitters around the threat of a potential default.

Expect gold prices to be also influenced by global growth fears and expectations around the Fed’s next policy move.

Looking at the technical picture, the precious metal remains trapped within a wide range on the daily charts. Should $2000 prove to be unreliable support, prices may sink to $1970. Alternatively, a rebound from $2000 could open a path back towards $2015 and $2032, respectively.

 

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